British Bank Bailout Loses Taxpayers £23bn

Taxpayers will end 2012 with a £23bn loss on their stakes in Royal Bank of Scotland and Lloyds Banking Group, illustrating the difficulty the government faces in attempting to make a profit from any sell-off of the shares in the bailed-out banks.

The loss is narrower than the £40bn deficit at the end of 2011 when the eurozone crisis was weighing heavily on the banking sector. But taxpayers had been nursing a £12.8bn loss at the end of 2010, a year that began with a £26bn loss. At one point during 2011 taxpayers almost broke even on their stakes in the banks, which were bought in tranches in 2008 and 2009, and in May 2010 showed a profit on the RBS stake.

In 2012 such levels were unattainable as the eurozone crisis continued and investors tried to assess the impact of new regulations requiring banks to hold more capital. While the Bank of England has told banks to raise fresh capital, the government has made clear it does not want to put more money into banks.

RBS shares ended the year at 324p, well below the 500p average at which taxpayers bought their 82% stake. The bank tried during the year to "normalise" its share price by turning pennies into pounds, which in turn moved the average price at which the shares were bought by the government from 50p to 500p. The closing price on the last day of 2012 equates to a £16bn loss.

Lloyds shares ended the year at 47.9p, below the 73.6p at which taxpayers bought a stake of just under 40% in the bank, which rescued HBOS during the 2008 crisis. This is equivalent to a loss of £7bn.

However, if the fee that Lloyds paid to exit the asset protection scheme – a toxic insurance policy – is included the break-even price falls to 63p and the loss is £4bn.

UK Financial Investments, which looks after the stakes in the bailed-out banks, has indicated it may be prepared to sell the shares at a loss and is known to have sounded out Middle Eastern investors about a potential deal. For instance some of the shares bought by the government were purchased at the equivalent of 31.75p.

But UKFI would need to convince big City investors to buy shares too, and they warned in December that requiring banks to hold more capital could make it difficult to generate big enough returns to shareholders.

The warning was from the Association of British Insurers, whose members control a fifth of the stock market. It added that UKFI would not be able to convince major City investors to buy shares in RBS and Lloyds until the bailout banks were able to start paying dividends again.

In 2013 Lloyds may be able to signal the resumption of dividends – banned by the EU until last year under the terms of state aid. Lloyds shares have ended near the year's high of 49.8p, having been as low as 24.7p. RBS has traded between 193p and 329p.